The American Dream: How European operators are preparing for regulated US sports betting

Listening to the Q4 conference calls of the major listed operators, one topic came up again and again: the US Supreme Court case that pits the state of New Jersey against the US professional sports leagues. Should New Jersey win, and online prediction markets make that around 87% likely – or a 1.15 shot for the gamblers out there – then US states could soon be free to regulate sports betting.

It’s certainly an enticing prospect for European operators, and not one that’s flown under the radar. “I believe sports betting could be a massive game changer,” said 888 chief executive Itai Frieberger. “Our current US assets give us a head start in the market,” said Paddy Power Betfair (PPB) CEO Peter Jackson. “We are keen to be in a position to take advantage of this opportunity as it evolves and we are investing accordingly,” said William Hill CEO Philip Bowcock. “The Group believes it is in a strong position should the sports betting market open,” said GVC. And so on, almost without exception, across the industry.

Analysts and investors are equally smitten. Barclays, for example, recently issued a note headlined: ‘US sports betting regulation will be a game changer for the European and US gaming sector’.

“The US sports betting market could dwarf the UK,” Barclays noted. “The opportunity is materially underappreciated and misunderstood. So last week, instead of sitting in Hammersmith for Paddy Power Betfair’s results and asking about the US opportunity, we met PPB’s US CEO in Los Angeles. Instead of attending GVC’s FY17 results in the City, we went to Las Vegas to meet with Ladbrokes Coral’s B2B business, Stadium Technology. We are now incrementally more positive on the opportunity for European investors.”

It’s not hard to see why, with a market of some 320 million people, who are among the most technologically savvy and sports-mad customers on the planet. But long-time observers of the US market may not be so bullish, having seen online gaming regulation move at a snail’s pace and regulation that at times has bordered on the ridiculous. For instance, a 54% tax on online slots, soon to be implemented in Pennsylvania, is the highest such tax on the planet. And like online gaming, sports betting looks almost certain to be regulated on a state-by-state level.

Size of the prize

For a clear-eyed estimation of the market, Eilers & Krejcik projects a 50-state market for regulated sports betting in the US would be worth anywhere from $7.1bn to $15.8bn in revenue.

However, its base case projections calls for 32 states to offer regulated sports betting by 2023, with varying approaches to availability and online betting, resulting in a market worth just over $6bn in annual revenue – that’s about one third bigger than the current UK betting market, so the prize is indeed significant. How each state chooses to regulate is anybody’s guess, with more than 20 states having some form of active or approved legislation at the time of writing.

A decent template, however, is West Virginia, the most recent state to pass a bill allowing sports betting. The legislation has been roundly praised by key stakeholders, including the American Gaming Association (AGA), and is likely to be put forward as a model for other states to follow. The bill taxes betting at 10% of gross gaming revenue (GGR), allows customers to register and bet online, and crucially does not contain the ‘integrity fee’ of 1% of turnover that the sports leagues have been calling for.

The other key part of the bill for European firms is that licensing is limited to the state’s five existing gambling licence holders. In other words, if you want to offer sports betting in West Virginia, you will need to partner in some way with the state’s land-based casinos – similar to the way online gaming was rolled out in New Jersey and will be in Pennsylvania.

“That’s going to be standard operating procedure for these states,” says Daniel Kustelski, co-founder of betting technology provider Chalkline Sports. “If you’re an operator, you’ve got to get into the supply chain, whether that’s by offering risk management, trading services or whatever. The European firms will be on the B2B side, with services provision and joint ventures, because the operators are going to be the existing casino brands – the MGMs and Caesars of the world.”

That seems to be the logic underpinning some major operator moves to date, starting with PPB, GVC and The Stars Group joining the AGA, which counts the major US casinos among its members. Is that worth the $75,000 joining fee alone?

Elsewhere, Stars recently acquired the platform of Aussie operator CrownBet, with one eye on offering it to US casino operators. The CrownBet tech, in particular, was potentially a savvy purchase because it has been integrated with Crown Resort’s land-based properties – a feature which would be vital for future US operations. “The ability to take land-based casino software and integrate a sports betting platform into that is going to be very important,” says Kustelski.

Pick a lane

GVC has also hinted at B2B ambitions, saying it could offer partners a “full technology suite from sports to poker to casino”, and was identified by Barclays as best positioned for US expansion. In part, this was due to Ladbrokes’ Stadium Technology business, which provides sports betting technology in Nevada. PPB is also identified as a front runner thanks to its existing casino and racing exchange in New Jersey, as well as its DFS operation Draft and nationwide ADW network TVG.

But there could also be significant rewards for firms willing to operate under their own brands, perhaps as part of a joint venture with a licence holder. William Hill, for instance, has said it is willing to go B2B or B2C, telling EGR it is aiming to be “fleet footed”, with so much still up in the air.

“Everyone is talking to everyone right now,” says Crispin Nieboer, Hills’ corporate development director, who is overseeing much of the US expansion. “We’re looking at everything, including joint ventures, and going it alone – because remember there is no national sports betting brand in the US right now. So we do have a chance to become that.”

“The US sports betting market could dwarf the UK – the opportunity is materially underappreciated” – Barclays report

The firm was identified by several interviewees for this article as perhaps the best placed to take advantage of any sports betting expansion by virtue of its existing operations in Nevada. The firm also has a high profile across the US, particularly with legislators with William Hill US CEO Joe Asher being a frequent speaker at legislative hearings.

“Asher and his deputies have been familiar faces at sports wagering industry conferences worldwide, including testifying at various state legislative hearings, and are well known in locales beyond Nevada,” noted a recent article on Sports-Handle.com, handicapping the race for US betting domination (Hills was priced as the 3/1 favourite).

The company is investing heavily in the opportunity, with a $10m increase in US costs last year, spent mainly on new office space and personnel. The firm is also considering opening a second major US hub.

“I think it is vital for anyone looking to enter the market to have some knowledge of the US market and some existing footprint in the US,” says Nieboer. He says already being regulated in the US will be a major advantage as the licensing procedures in the US can take far longer than most European jurisdictions.

The daily fantasy opportunity

The one area Nieboer admits to a shortfall in Hills’ plans is the lack of a nationwide database of players. Yet he refuses to be drawn when asked whether Hills would consider trying to purchase that kind of database from someone like FanDuel or DraftKings.

These DFS firms arguably have the only nationwide database of fans that have shown an interest in wagering on sports, and both firms have made moves towards betting, with DraftKings recently appointing a head of sportsbook. Their plans are still opaque, although the consensus is they would be more likely to partner with a sports betting provider and tack on a sportsbook to their site, rather than go it alone.

Could they be a useful entry point for an operator? Eilers and Krejcik noted: “DraftKing’s new head of sportsbook Sean Hurley has no direct operational experience on the sportsbook front; his resume appears more suited for a business development role, suggesting DK may be more interested in a licensing than platform play in the near-term.”

FanDuel, meanwhile, has long been considered a takeover target for an international sportsbook and, if the experience of Paddy Power Betfair and DFS operation DRAFT is anything to go by, it’s an interesting route into the market, with benefits for licensing and customer acquisition.

Indeed, M&A could prove to be the most efficient entry point for firms not possessing the existing operations that Nieboer says will be so critical. Online horse betting operator Churchill Downs showcased this idea recently when it purchased two casino properties in states with existing sports betting legislation – Pennsylvania and Mississippi – for a total of $229.5m. The kicker of course is that both properties come with a gaming licence, and will be first in line for sports betting licenses down the road.

“That was an excellent bit of business,” says Kustelski. “If those two states allow sports betting from the word go, Churchill Downs just got two licences – and for not very much.”

The competition

Presuming there is a route to market for European firms then, how do they stack up against their American competitors – the likes of MGM, and Caesars, who run sportsbooks in Nevada and have multiple casino properties across the US?

“I’m very optimistic about the European operators,” says Robert Walker, a bookmaker at Nevada-headquartered USBookmaking, and a veteran of the MGM, Boyd Gaming and the Orleans.

Head start: William Hill believes it’s in a strong position to capitalise on US sports betting opportunities

“The stuff the European books do with push marketing for instance is superb. They’re so aggressive because they have to be, but we don’t really have that in Nevada. For the most part, we cater to the people in our casinos. We haven’t had to go out and compete. For us, it was a case of ‘if you build it they will come’, and they did. So Europe is far ahead in that area, but of course there’s room for a lot of players.”

Daniel Kustelski, however, warns that operators need to understand the fabric of sports in the US, “where the sheer quantity and velocity of games is far above Europe and American football is the most popular sport, ahead of basketball and baseball”.

“They’ll need to understand those sports and engage with stakeholders about what works and what customers want, because it isn’t necessarily the same as in Europe,” Kustelski adds.
There are also questions about margins. Nevada held around 4.5% of its turnover last year, significantly below European operators who average closer to 8%. Is that a product of the market itself or down to things like cash-out and request a bet, which may not immediately be available?

Lost in translation

And what will the US product itself look like? Nevada offers a clue, where William Hill’s European-style app handles the most volume in the market, while MGM’s offering, powered by IGT has also won plaudits for its usability. The MGM homepage, for example, is populated by various speech bubbles containing a selection of bets based on the user’s preferences. And it’s this type of mobile first design that could be the dominant interface, according to several experts.

“I think European sportsbooks scare the mass market in the US,” says Kustelski. “Even something as simple as the moneyline can be alien. I think simple is going to work, so companies should build a product around the key markets of moneyline, spreads and totals.

“The company that can figure out that type of mobile first UX is going to win. We check our phones 150 times a day, everything is mobile, so how do you offer a simple, easy mobile experience. That should be the key question.”

Source: Legal Sports Report

Adam Wilson, the co-founder of swipe-to-bet app Bookee, was involved in the New Jersey online gaming market when it first came online back in 2013 and echoes the sentiment that simplicity should be top of mind when entering the market.

“The first sites in 2013 were simply too complicated,” Wilson says. “Digital operators had taken sites built for their European customers, who had been online for years, and skinned them with minimal changes for the good folk of New Jersey, who hadn’t been gambling online for nearly a decade, if at all.

“It was with inescapable irony that the less sophisticated sites that had clearly rushed the getting-online process, namely Virgin, started to punch way above their weight. This again was a clear indication that the US market was simply not ready for the same products being used by a mature European market.”

Wilson adds: “What will absolutely not work for the US market is the interface adopted almost without exception in the UK, which is best understood as a spreadsheet built for desktop, squeezed onto a mobile interface.”

The customer comes first

And while US customers may be new to the sports betting game, they will not be new to using their mobiles for just about every other aspect of ecommerce.

“Because this is so new, consumers aren’t going to be comparing between ten firms with hundreds of football sub-markets,” says Keith O’Loughlin, the executive vice president of sports at OpenBet. “Their comparison is sites like Amazon and eBay, consumer sites. So this is another consumer site effectively and the bar will be high in making sure the customer experience is really good.”

O’Loughlin adds: “Consider the customer experience in the US as a whole. You walk in to any restaurant or shop in the US, and the customer service is far more intense and caring and salesy than it is in Europe.

“And casinos know that and are amazing at it and managing their customers. That’s going to shine through in CRM and customer experience. Those kind of things will go a long way to counteracting price.”

“They’ll need to understand those sports and engage with stakeholders about what works and what customers want” – Daniel Kustelski, Chalkline Sports

His last point is crucial. The ability to compete on price is still up in the air, depending on the taxes and fees imposed on operators, which may hinder the ability to compete with a thriving black market.

There are then an awful lot of unanswered questions about the US betting market – tax rates, integrity fees and the availability of online betting for starters, not to mention whether the Supreme Court will even let the dance start.

However, as bookies will tell you, the risks and rewards are often heightened with uncertainty, and the rewards for getting in early could be huge. Kustelski points out that customer acquisition costs are now as “low as they’ll ever be” and could be less than 5% of LTV.

With the market projected to dwarf the UK in as little as five years’ time, the rewards are obvious for operators willing to take the plunge and crank up their investment in the US.

Firms who have been active in New Jersey and Nevada will undoubtedly have a head start, but there are still routes to market for the latecomers. And as for the size of the prize, well everything’s bigger in the US.